Yesterday CBO released an issue brief explaining the long-term projected growth in Medicare and Medicaid spending as a share of the economy. (Nice job, Noah!) CBO Director Peter Orszag blogged on it, too.

Here’s the main conclusion, as summarized in Peter’s post (my emphasis added):

Regardless of the assumptions and methods used in the projections, the results were basically the same: More than half of the growth in federal spending on Medicare and Medicaid is attributable to health care costs per person growing more rapidly than per capita GDP. Depending on the approach used, by 2082 between 53 percent and 60 percent of the accumulated growth is attributable solely to cost growth, between 14 percent and 17 percent is attributable solely to aging, and the remainder (between 26 percent and 30 percent) is attributable to the interaction of those two factors as costs grow and the population ages at the same time. Over the next 25 years, aging will be relatively more important, accounting for between 27 percent and 35 percent of projected growth by 2032, but even during that period, CBO’s estimates suggest that more than half of the growth in spending will result from rising costs per beneficiary.

I suppose at first blush one might say this has good, optimistic policy implications, because only about 15 percent of the growth in health spending is due to forces beyond our control. (We can’t stop people from growing older–or at least we can’t morally consider the alternative.) Most of the growth in health spending is due to the “excess cost growth” of per capita health spending rising faster than per capita GDP (i.e., health costs growing faster than the economy). That cost growth is at least potentially within our policy control.

But consider what CBO’s numbers imply about how much we’d have to avoid in that “excess cost growth” in order to eliminate the rise in Medicare and Medicaid spending as a share of GDP. Even if the aging of the population (what we can’t change) is only 15 percent of the problem, that means that the excess cost growth (what we might be able to change) which is the other 85 percent, would have to be avoided by more than 100 percent (or cut by 100/85=118%), in order to “flat line” health spending as a share of GDP. In other words, we’d have to be able to get health costs to actually grow slower than the overall economy (not just less faster).

I view this as a daunting challenge and am not comforted by even CBO’s optimistic attitude in their commitment to work hard on analyses of health spending and ways to control it. The politicians certainly don’t like to talk about “rationing” health care, so they talk about much less awful sounding ways to control health costs, such as improving the use of medical information technology. But in another very recent CBO analysis, on the costs and benefits of health IT, CBO notes that (my emphasis added):

…a recent study by the RAND Corporation estimated about $80 billion in net annual savings that is potentially attributable to such technology. This study has received significant attention, but unfortunately it suffers from significant flaws…

CBO notes that the $80 billion savings figure is for all health care spending (not just federal spending) and is only a “potential” impact under “widespread adoption.” They also point out that total health care spending in the U.S. economy is about $2 trillion per year, so the $80 billion is only 4 percent of the total health bill. In other words, those “much less awful sounding” ways of reining in health care costs are also much less likely to be successful.

So I am not comforted by analyses that determine that most of our long-term fiscal challenge is due to the excess cost growth in health spending, rather than just the unavoidable aging of our population. We can look at optimistic projections that assume some slowing in that excess cost growth (e.g., as the Medicare Trustees do), but the reality is that we are still far from understanding what policies would actually work to step on the brake–and whether our society can tolerate such policies.

That gets back to the basic budget math and why I think there’s no way one can argue that the “right” level of government spending is that which can be supported by revenues at their 40-year historical share of GDP.

This morning I participated in the first meeting of a new working group on federal subsidies, with a bunch of other budget policy experts. The purpose of the working group is to help in the development of a new, comprehensive, online database that will catalog federal “subsidies.” Putting aside the really thorny issue of how does one define a “subsidy” (I’ll look up the dictionary definition later), this morning the group was to discuss how such a database could be constructed to attract, and be useful to, not only a policy-analyst audience, but also the general public–i.e., ordinary people, and hopefully millions of them.

I said the subsidies database and website should be both “sexy” and “smart”.

The “sexy” part requires that it get specific on what particular companies get how many dollars in subsidies, in order to get the attention of (and perhaps spark the “outrage” in) the general public. Maybe the site could even feature a “subsidy of the day” as the headline to grab the big and broad audience. This is the quality that would appeal to the “investigative reporter” in all of us. (Bloggers would love this aspect of the subsidies website.)

The “smart” part requires that the subsidies database be comprehensive (including subsidies on both the tax and spending sides of the budget) and organized/categorized according to the purpose and policy goals of the subsidies–e.g., to increase access to higher education, to promote a cleaner environment, to reduce infant mortality, to encourage development of new technologies, etc. Such smartness is the quality that would appeal to the “good, informed public citizen” in all of us. (Ultimately, this is how the public could move from being informed to being influencial regarding how the government spends their tax dollars, as well as how analysts will be able to do the cost-benefit calculus that could lead to the formulation of more efficient policy.)

So “smart” and “sexy” is what I think the online federal subsidies database has to be, in order to have mass appeal and make a difference.

Come to think of it, that’s sort of the idea I had in creating EconomistMom.com.

But no, if I really combined those qualities here, this would be “EconomistBabe“, wouldn’t it?

Steven Pearlstein gets it exactly right in his column in today’s Washington Post when he relates the current headlines on our economic woes to our broader, longer-term economic challenges, including our government deficits problem. He leads off with:

Suddenly, it seems, we’re getting hit from all directions.

Energy and food prices are soaring. The housing market continues to collapse. Government revenue is falling, and taxes are rising. Airlines are jacking up fares and fees while reducing service. Banks are pulling credit lines. Auto companies are cutting production once again. Even investment bankers are losing their jobs.

The tendency is to see these as separate developments, each with its own causes and dynamic. Fundamentally, however, they are all part of the same story — the story of the global economy purging itself of large and unsustainable imbalances that for a time allowed many Americans to think they were richer than they really were.

And he concludes with:

Across the country, state and local governments are already hip-deep into budget crises in response to declining revenue from property assessments and real estate transfers. Here in Washington, a dramatic drop off in revenue from business profits and capital gains has wiped out any hope of reducing federal operating deficits that, under the likeliest political and economic scenarios, will exceed $500 billion a year for as far as the eye can see.

This is another example of an unsustainable equilibrium that has roots in the trade deficit and the credit bubble. Despite the happy talk you might be hearing from the presidential candidates, it presents Americans with a stark and unpleasant choice.

One option is to raise taxes and leave less money for private spending, which is what many state and local governments have begun to do. The other is to accept lower levels of government service and subsidies, which inevitably will lower the incomes of some households while forcing others to go without services or pay for them privately. Either way, it amounts to a lower standard of living than we thought we had achieved.

Is all this the end of the world? For the richest country on the planet, certainly not. But it does represent the end of a decade or more during which Americans were permitted and even encouraged by the rest of the world — and by their own leaders — to live way beyond their means. As a result, the United States has gone from being the largest creditor nation to the world’s largest debtor. For the first time since the early 1980s, Americans will have to endure several years of uncomfortably slow growth and uncomfortably high inflation as the U.S. economy regains its balance and creates a foundation for more solid and sustainable growth.

Steven’s conclusion is exactly right–this is not the end of the world. It’s simply that for awhile now, both individually and collectively, we Americans have been saving far too little. Part of it was because of our American nature, wanting more things, and sooner. But part of it was because our institutions, both public and private, encouraged or at least enabled us to do that “living beyond our means.” It has led to this “super subprime” crisis. But now natural market forces, and hopefully new political will, we lead us back to a new “equilibrium,” where our economy will not go down in flames but will walk through the flames (save more) and emerge stronger in the longer run for it.

Second, this Washington Post story citing a Consumer Reports study says it doesn’t make financial sense for a household to switch from a gas-guzzling SUV to a hybrid even at today’s $4.00/gallon price of gas.

They are consistent stories, because it’s true that the private financial incentive to buy a hybrid vehicle depends on the price of gasoline, but at $4/gallon, we’re just not yet near the point where the scales would tip toward the hybrid for a typical, purely selfish consumer.

This goes back to the fact that we have unusually low gasoline prices in the U.S.–yes, we still do, even at $4+ per gallon. Go look at this graph I found on the Energy Department’s website, which really puts things in international perspective (I can’t copy it well here):

(The US is that bottom line that’s less than half the height of all the other lines.)

And the market price for a gallon of gasoline still falls far below where most economists would estimate the social cost of consuming a gallon of gasoline, after trying to account for the social costs of pollution, congestion, and yes, global warming. (If you are interested in the rather complicated math, read this nice Resources for the Future survey.)

And speaking of gasoline prices being too low, here’s a third item from today’s (Sunday) news that I just picked up through the Environmental Economics blog: Cornell economist Robert Frank argues (in today’s NY Times) that gasoline taxes are too low, and wouldn’t it be nice if we could use higher energy taxes to reduce the deficit (emphasis added):

Gasoline is one of a host of goods whose production or consumption generates costs that fall on outsiders. Noisy goods, like leaf blowers, for example, can jolt whole neighborhoods from calm. And goods that don’t biodegrade readily, like many plastic bags, can generate costly waste streams. The list goes on.

That the invisible hand often breaks down is actually good news. After all, we need to tax something to pay for public services. By taxing forms of consumption that generate negative side effects, we could not only generate enough revenue to eliminate budget deficits, but also help steer resources toward their most highly valued uses.

Hooray for environmentalist deficit hawks! (You know I’ll keep pushing this idea of “going green” with our taxes to “get out of the red”…)

So with gasoline prices still “too low”, it’s not a shock that purchasing a hybrid doesn’t pass the individual consumer’s cost-benefit test, if one measures the “benefit” of a hybrid on pure “gas dollars saved” terms.

We all know people who already own hybrid vehicles, and we know they don’t own them to save money for themselves. They own them to save the environment and to do their small part to reduce global warming. They were willing to pay more for a hybrid vehicle not because the savings in gasoline purchases outweighed the extra cost of the hybrid (because it doesn’t), but because they’re socially conscious people. Any personal savings in their own fuel expenditures is just a bonus to them.

It’s a little like when people donate to public television or radio and get sent a little bonus gift–you know, the DVD set of a documentary series, a tote bag, etc. (Many years ago I was happy to get a stuffed Barney from PBS.)

There will always be these socially-conscious people out there to buy and support the things that don’t make sense from a purely private, selfish perspective, and thank goodness for them. But if we’re ever going to see more than the socially-conscious people buying fuel-efficient vehicles, then the price of gasoline will need to keep rising, and the cost of purchasing those fuel-efficient vehicles will have to fall. Or we need to make driving hybrids a “hip” thing to do, even for those who aren’t already hip “tree huggers.”

More on this idea later this week… I have selfish as well as socially-conscious reasons for my interest in this topic.

Suppose I’d love to go out to Arizona this weekend. I hear Sedona is really lovely this time of year (as well as the place to be this weekend if one wants to bump into Senator McCain or any of his VP hopefuls)…

Mr. Ryan’s plan has been praised by at least one budget watchdog group for its specifics in how it would eliminate budget deficits, which is mainly through a per-beneficiary limit on Medicare spending.

But CBO did not analyze what the effect of such a rationing of health care would be on the economy.

Here is what Mr. Ryan says about the CBO analysis in his press release:

Here’s what CBO found – Under the Roadmap, GNP per person would be a full 85 percent higher than if we remain on the current course. Hence, this plan maintains the American legacy of leaving the next generation better off.

How Would the Slowing the Growth of Deficits Affect the Economy? The minority staff of the House Budget Committee provided CBO with a target path [that] slows the growth of budget deficits. In evaluating the economic effects of the target path, CBO did not examine how specific policies to achieve that path would affect the economy; instead, CBO limited its attention solely to examining how the deficits produced by the target would affect the economy, assuming that such effects would play out as they have in the past. (CBO has not evaluated either the political feasibility or the economic effects of reducing spending sufficiently to accomplish this path for the deficit. Furthermore, the spending and revenue targets provided by the Committee staff are not the only way to achieve a sustainable budget path. Alternative policies will have different effects on the economy, and changes in taxes and spending can exert influences on the economy other than the effects of reducing budget deficits.)

In other words, CBO’s analysis is just as much an analysis of the economic benefits from the Ryan plan as of the economic benefits of reducing the budget deficit entirely by raising revenues. Which gets back precisely to the point I made earlier about the CBO analysis when I noted that:

Congressman Ryan didn’t ask CBO to show what cuts to the entitlement programs and other government spending would have to be done in order to keep taxes as a share of the economy at its 40-year historical average, now did he?

I obviously meant that mostly as a cute punch line, but that was before I realized that Mr. Ryan would try to say that CBO had actually analyzed exactly that.

This Wednesday the House passed a pay-go compliant ”Energy and Tax Extenders Act of 2008″ (H.R. 6049), despite all the “banana peels” on the House floor. Avoiding an increase in the deficit is a good thing, but I still don’t like these “tax extenders”, also known as renewal of “expiring tax provisions.” What’s the problem with renewing these expiring tax provisions?

First, they’re constantly expiring, most over short (1-2 year) periods of time, which means that the cost of the underlying policy is grossly understated in the official, current-law budget baseline. This means our baseline grossly overstates the amount of revenue the federal government will collect under current tax policy (as opposed to current tax law), and thus grossly understates the budget deficit.

Second, they’re constantly being renewed (not allowed to expire), which means: (i) for all practical purposes, the “expiring” label is virtually meaningless, and (ii) for all practical purposes, the need to revisit these provisions year after year to renew them (yet again, for yet just another year at a time) is really a pain in the legislative butt.

So if they’re constantly expiring and constantly being renewed, why don’t we just pass them in permanent form and avoid the once-a-year legislative hassle?…

The answer is not as simple as you may think, if you’re thinking this is just like the expiration of the 2001 and 2003 tax cuts–where the expirations were designed to artifically hold down an already gargantuan cost. Many of these one-year tax provisions–which by the way are tax cuts (or “tax expenditures“), never tax increases–are individually quite small in cost.

I never understood the “why” about expiring tax provisions until one very late night markup of the “extenders bill” several years ago while I was working for the Ways and Means Committee. Bleary-eyed, one of usually twinkly-eyed members plopped down in a chair next to me in back of the dais–just to take a little rest away from his member’s seat. I asked him “why do we have to do this every year?…why can’t we just pass these things permanently?”

His eyes suddenly twinkled again, as he looked at me with a combination of amusement and disbelief. He said: “Are you kidding me?… We couldn’t do that!… Why, I’d lose all my friends!…Who would come visit me and say kind things to me and do nice things for me then, if they didn’t have to come back every year to ask for these tax provisions?!!” And he nodded at me, pleased, when he saw that I was nodding at him.

Since then I’ve never suggested to a politician that they really should make these things permanent. But the annual ritual still annoys me. I suppose that lately it annoys me even more because of the “biggest banana peel” problem. The House members who supported extending these expiring provisions without paying for them argued on the House floor that it “doesn’t make sense to pay for renewing these tax cuts by raising other taxes.” That sounds so much more compelling than a more accurate description of their position which would say “it’s ok to pay for renewing these government subsidies by raising our children’s taxes” (the federal debt).

While I think the renewal of these temporary provisions ought to be paid for, it does bother me that the offsets used in this bill, when not outright gimmicks, were largely permanent in nature, because it means we can never again go to that revenue source when we over and over again have to revisit these tax cuts and find newer and newer ways to pay for them.

Oh, and by the way, these paid-for tax extenders passed in the House this week did NOT include the most expensive of all the expiring tax provisions, relief from the Alternative Minimum Tax (AMT), which already expired at the end of 2007. (The cost of a one-year AMT “patch”, estimated at over $60 billion, is greater than the full cost of this week’s bill ($54 billion), which includes the other extenders PLUS all new energy tax incentives PLUS some “stimulus”-type temporary tax provisions.) Congress will have to pass AMT relief later this year, and of course we’re fully expecting a repeat of last year, when AMT relief was ultimately not paid for (except maybe through our children’s future taxes). And even without a paid-for AMT patch, the White House has threatened to veto this House-passed bill anyway, because of the offsets (revenue increases) used to pay for the smaller expiring tax provisions.

UPDATED AGAIN Thurs. 5/22: UPDATED late Wed. 5/21: Be sure to tune into the House floor (C-SPAN) sometime tomorrow (Wednesday) Thursday (it was pushed back) to see It’s now being reported that the vote on the House-Senate conference agreement on the FY2009 budget resolution will not happen until June, due to a procedural glitch in the farm bill.The Senate will vote is also expected to vote on Thursday. Too bad, as I thought you’d hear more today about “the largest tax increase in American history,” which surely has been the biggest “banana peel” in the congressional budget process over the past two years. I use “banana peel” in the “distraction” sense, referring to my personal mishap over the weekend when I made the mistake of picking up the banana peel. You could also think of it in the more traditional, “slipping up” sense. (Gee, maybe the farm bill “slip up” is now the biggest banana peel in the budget process…)

The “largest tax increase in American history” is the affectionate term used to describe how the House-passed resolution stuck to revenue levels that correspond to official CBO baseline (current-law) revenue levels. I’ve spent many hours trying to explain what that means to both members of Congress and ordinary people, but the shortest explanation is that these are the same levels of tax revenues that would be achieved if Congress shut down and went home for the next few years, so that no new tax laws were passed. The “largest tax increase” in history is actually already scheduled to take place under current law, because some of the “largest tax decreases in American history” (the tax cuts passed in 2001 and 2003) are scheduled to expire at the end of 2010 under current law.

Why do I consider this the biggest banana peel in the congressional budget? Because it’s a major distraction of politics over policy, for both political parties.

For Congressional Republicans, the rhetorical line is so irresistable that they have gotten completely distracted away from having the chance to make their case for the large, deficit-financed tax cuts they are implicitly proposing. They are arguing against a huge tax increase, rather than arguing for a huge tax decrease. The Republicans are also distracted away from elaborating on the ways that they’d reduce the deficit through the spending side rather than the tax side. And they are distracted away from talking about the longer-term need for entitlement reform and tax reform–topics I know they like to talk about.

For Congressional Democrats, the rhetorical line is so aggravating that they have gotten completely distracted away from making their case against the large, deficit-financed tax cuts that the Republicans are implicitly proposing. The Democratic response has been purely defensive; they point to the fact that their pay-go compliant revenue policy only sticks to the plan under current law–that the budget resolution does not and cannot change tax law. Thus, they accurately (but narrowly) point out: the budget resolution does not raise taxes by one penny. They fail to respond in the way I have only dreamed about (…you’re darn right it’s the largest tax increase in American history!), that would boldly argue that deficits matter, that tax cuts don’t pay for themselves, and that there are many ways to raise revenue that don’t involve inefficient increases in marginal tax rates (see many other previous posts). (Democrats can look good talking about entitlement and tax reform, too.)

For both sides, the rhetoric has been so engaging that it led to most of the sticking points in the negotiations on the budget resolution–which were mostly over revenues and whether tax cuts should be deficit-financed or made to comply with pay-go rules (allowing the “largest tax increase in American history”). After the ultimate, exhausting demise of pay-go in last year’s extension of AMT relief, this year the Blue Dogs (bless their hearts) were trying one more way of getting pay-go-compliant tax relief into the budget resolution, by using reconciliation. After the Senate wouldn’t go along, the Blue Dogs (bless their hearts) did their best to negotiate a minimum-acceptable semblance of fiscal discipline in the conference agreement.

Now, I think the conference agreement is a pretty ugly mess (more explanation later this week), but those of us who support fiscal responsibility have to admire the budget committees’ and House and Senate leadership’s valiant effort to come to agreement–and that a congressional budget resolution will indeed be passed, for the second year in a row, and in an election year. Not an easy feat.

Still, please remember as you watch the floor debate that that “largest tax increase in American history” is just a gigantic banana peel. And dream about next year when maybe we won’t be so distracted and can turn our attention to the real and critical budget policy issues.

The other day I took my two younger kids for their regular dental checkup, and our long-time dental hygenist, Sue, said to me, in disbelief, that kid #3’s teeth actually looked pretty straight, compared with kids #1 and #2, who have already been through two palate expansions and three sets of braces between them, and compared with kid #4’s dental situation, which Sue always refers to as something like a “major excavation and reconstruction project” ahead…

Let me pause here to say that having already paid for three sets of braces on just two kids, I often wonder if orthodontics are a way of giving families “practice” in paying outrageous bills–i.e., practice for (or prevention of?) paying for college. It was at the time kid #2 was about to get her second set of braces, that I first realized that this “double braces” treatment that I had agreed to before she got her first set of braces, was going to be double the cost. Of course, I had to swallow hard and pay the bill, but as an economist and not just a mom, I was left wondering if early orthodontic treatment makes economic sense for anyone but the orthodontist. Does one end up spending double the money for the same ultimate result? Or is the result that much better that it’s worth paying for the early treatment? Anyone out there know?

…Well, back to kid #3’s story: Sue the hygenist asked what the orthodontist had said about kid #3, because although kid #3 looked pretty good, it wasn’t completely perfect, and I happily reported that the orthodontist said this kid would NOT need braces, and if the orthodontist himself is saying that, you know it would be totally frivolous to spend all that money to correct very minor imperfections in kid #3’s teeth. I went on to say, with a laugh, ”well, I’d get braces for myself before I’d get braces for her–you know how messed up my teeth are.”

But afterwards I realized that no, I wouldn’t really get braces for myself before I’d get braces for my almost-orally-perfect kid #3. I wouldn’t do that, because that would seem even more frivolous–not because my teeth couldn’t objectively use some fixing, but because I’m too old and far along in my life to make straightening my teeth a wise investment. Heck, my teeth are awful in more ways than how far from straight they are; I’ve had so many root canals and crowns since age 40 that I’m convinced I’m not that far away from having all my teeth fall out. And how would I ”use” straight teeth?… I know I’m not going into a career in show business, despite the unusual movie stardom of my boss, Bob Bixby.

(My own parents had already done the cost-benefit analysis on my orthodontic situation when I was a kid, and when my younger sister was so obviously in greater need of braces than I–so she got them, and I did not. My parents were not economists, but they’ve always been better at family/home economics than I am. They knew how to budget as if there were constraints, because they had them (they were working in academia as underpaid scientists)…)

But kid #3, well, she could very well become a movie star someday….she’s danced at the Kennedy Center twice after all (I’m sneaking in the brag book)… or even if she doesn’t, she’s young and has her whole, pretty life ahead of her! The marginal lifetime benefit to perfecting her teeth is way higher than the marginal lifetime benefit to fixing mine, if only because she has a lot more lifetime left.

All parents know that spending money on one’s children never feels quite as frivolous as spending money on oneself. I know that pretty much anything that my kids don’t immediately consume–and I mean literally consume, as in EAT–I think of as worthwhile investments. (Come to think of it, I justify buying that more expensive, organic food for them at Whole Foods, as an investment, too.) The thousands of dollars spent on my kids’ music lessons, ballet school, sports, all sorts of camps, their hobbies (kid #2 is a great photographer), etc.–all wise spending that gives my kids a “richer experience” with life that will make them better, more productive, happier adults. (That is why the term “enrichment” is such a great way to get parents to spend money.)

There might be a little bit of irrationality in how parents do the cost-benefit analysis when it comes to their kids (more on this in many future posts), but I think parents do the intergenerational math much better than the government does. Becoming a parent makes one a lot more far-sighted and forward-looking (even with the occasional banana-peel slip ups), while the politicians and policymakers seem to only see as far as the current electorate and immediate distractions (banana peels all around). As a public finance economist and a mom, for years I’ve felt that the government invests too little in the human capital of the young (i.e., in their education and health care), while government spends too much on the pure consumption of the old, whether that be subsidies for old industries that don’t need them, or tax cuts for really rich, old people who have just transitioned to being really rich, dead people. As a society, it’s not a wise investment strategy and doesn’t maximize social, lifetime net benefits. It makes as much sense as my getting braces.